Setting Custom Orders in the Stock Market: Limit and Stop Orders

In the complex world of the stock market, customizing your orders to suit your trading strategy is crucial. Whether you want to buy at a price point above the current market price or below it, understanding the differences between limit and stop orders can help you execute your trades effectively. In this article, we will explore the key concepts and strategies for placing limit and stop orders, as well as the tools and platforms that can assist you in your trading journey.

Understanding Limit and Stop Orders

Both limit and stop orders play a vital role in trading, but they serve different purposes. A limit order allows you to set a specific price at which a security can be bought or sold. For example, if XYZ is currently trading at 80, a limit buy order at 85 means you will only buy XYZ when the price reaches or falls below 85. Conversely, a stop order is triggered when the price of a security reaches a specified level, at which point your order will be executed.

To illustrate, if you believe XYZ will rise, you might place a buy-stop order at 85. This order will automatically turn into a market order once the price of XYZ reaches or exceeds 85. On the other hand, if you think XYZ will fall, you could place a buy-limit order at 75. This order will only be executed when the price of XYZ falls to or below 75.

Gaps and Risk Management

While limit and stop orders can be highly beneficial, it’s important to be aware of the concept of gap risk. Gap risk occurs when the price of a security moves sharply in a short period, often overnight or during a holiday. This can result in orders not being executed as intended. For instance, if XYZ opens at 90 the next day, a stop order placed at 85 would be triggered, but a limit order at 75 might not be executed if the price opens below 75.

Personal experience has shown how critical these factors can be. In a futures trade, I made the mistake of holding a position from Friday's close to Sunday’s open. I was short on 4 contracts of natural gas. When the price opened on Sunday significantly higher than my stop price, the trade was executed, and I lost 2600 in a matter of seconds. Had I closed the position earlier, my losses would have been much more manageable, around 500.

It is imperative to have a set of rules for yourself, especially in volatile markets. It is generally recommended to place stop and limit orders as day orders instead of Good Until Canceled (GTC) orders. Day orders are valid only for that day’s trading session, while GTC orders remain in effect until the order is filled or canceled.

Using Trading Platforms for Custom Orders

Many online brokerage firms offer tools that allow you to set custom orders and alerts. For example, T.D. Ameritrade provides straightforward ways to place both limit and stop orders. However, for those who seek more advanced features, custom order capabilities, and real-time data, platforms like Worden TC2000 might be worth considering. Worden TC2000, a powerful trading platform, allows users to set their own alerts using various criteria. While it is quite pricey, many traders find it essential for managing their trades effectively.

Combining Orders for Strategic Trading

For those who want a more nuanced approach, trading platforms offer the option to combine multiple orders into a single "two follows one" order. This type of order can be incredibly useful for executing complex trades. For instance, if the current price of XYZ is 80, and you want to buy at 75 and sell at 90, you could place a "two follows one" order with the following criteria:

When your limit to buy at 75 is executed, the other two orders become market orders. This helps in not only entering a position but also managing risk and taking profits based on predetermined levels.

For a deeper dive into the strategies and types of orders, you can consult articles and guides at Investopedia. Additionally, platforms like TradeStation offer simulated trading accounts, allowing you to practice and hone your skills without risking actual capital.

In conclusion, customizing your orders is a fundamental aspect of successful trading. By understanding the nuances of limit and stop orders, managing potential gaps and risks, and utilizing advanced trading platforms, you can execute your trades more effectively and mitigate potential losses. Happy trading!